ITAT explains the expression wholly and exclusively used in section 37 – ITAT

ITAT explain the expression wholly and exclusively used in section 37. ‘Wholly” relates to quantification and “exclusively” refers to the motive, objects and purpose of the expenditure.

ABCAUS Case Law Citation:ABCAUS 2616 (2018) (11) ITAT

The appellant assessee was in appeal before the Tribunal against order of CIT(A) in confirming disallowance u/s 37 of the Income Tax Act, 1961 (the Act) of labour expenditure made by the Assessing Officer (AO).

The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, the AO noted that the assessee has debited amounts towards labour charges paid to Labour contractors.

In order to examine genuineness of the expenditure, the AO issued notice under section 131 of the Act and recorded statement of the labour contractors. He confronted the assessee with the outcome of these statements.

Qua query of the AO, it was submitted by the assessee that the labour contactor business was being carried out in the name of wife by her husband. Hence with regard to the details of business, its nature, dealing with others, must be in the knowledge of the husband who were actually conducting business.

The assessee submitted complete details of such labour expenditure. He also submitted ledger account, labour bills & contracts, bank statements etc. showing payment through bank channel, acknowledgement of income tax returns of the recipients who had offered this labour charges as their income. The assessee also has submitted TDS details.

However, the AO was not satisfied with the explanation of the assessee, simply for the reasons that the lady-contractor could not explain the nature of work done by them or any outstanding amounts, if any towards the assessee.

The AO was of the view that the assessee had created demi-contractors and inflated the expenditure. Therefore, he disallowed labour expenditure payable to labour contractors.

Appeal to the CIT(A) did not bring any relief to the assessee

The Tribunal observed that in order to claim expenditure under section 37(1) of the Act, the assessee is required to fulfill certain conditions viz.

(a) there must be an expenditure,

(b) such expenditure must not be of nature described in sections 30 to 36,

(c) expenditure must not be in the nature of capital expenditure or personal expenditure of the assessee, and

(d) expenditure must be laid out or expended wholly and exclusively for the purpose of business or profession.

The Tribunal explained that the expression “wholly” employed in section 37 relates to quantification of the expenditure, while expression “exclusively” refers to the motive, objects and purpose of the expenditure.

The Tribunal opined that the assessee had demonstrated the incurrence of the expenditure for the purpose of business. It had submitted contract details from AUDA or AMC how these contracts completed by it with help of labour contractor.

The assessee had submitted that labour bills and contract indicating the working assigned by it to different labour contractors. It had submitted bank statement showing payment through banking channel to labour contractors. It had produced income tax return of the contractor showing income of these receipts received from the assessee. It had produced TDS details. It had produced comparative analysis of the GP as well as NP of earlier years vis-à-vis this year. It had also demonstrated how profit will abnormally rise if these disallowances are being included in the income of the assessee.

Thus, the Tribunal opined that complete circumstantial evidence produced by the assessee indicated that it had incurred these expenditure for completing the work.

The Tribunal noted that the only circumstances with the AO was that proprietorship concern of the labour contractors were in the names of ladies and actual work were being looked after by their husbands, hence, they were not having knowledge of their business.

The Tribunal opined that these circumstances, ought not to be looked into in isolation for disbelieving the claim of the assessee. The Receipts had already suffered tax in the hands of the recipients. Work had been done. There were no doubt with regard to the contracts obtained from AUDA or AMC and completion of work.

The Tribunal opined that in view of the above, actual expenditure must have been incurred on such work. The claim of the assessee can not belied simply for the reasons that some of the labour contractors were not having complete knowledge of the contract which was being looked after by their husband.

The Tribunal deleted the impugned disallowance holding that the Revenue authorities failed to appreciate actual circumstances of the dispute.